There are many different types of mortgages for an investment property. Using other peoples’ money is a great vehicle in real estate investing that helps you maximize the return on your investment. There are a few types of loans available in the marketplace today, and we want you to understand how they work.
Types of Investment Home Loans
The most common mortgage is a 30-year fixed rate conventional loan. There is also a 15-year conventional loan that comes with lower interest rates but higher monthly payments, and there are interest only loans with much lower payments but there is usually a five or seven year call on them.
Seller financing is also available, and that’s usually interest-only. Sometimes, loans can be found with negative amortization. This means you are making payments on the loan, but the amount you owe is still going up because you are not paying enough to cover the interest. This is the type of loan that contributed to the real estate bubble which created a number of upside down mortgages. Therefore, it’s not really available anymore.
A Loan for Every Investment Plan
The best loan depends on your overall investment plan. Let’s say your investment is going up nicely and you can afford to consider a shorter-term product. Lower interest rates, interest-only loans, and loans with a balloon would work.
Maybe you are buying a particular property and the cash flow would be negative in an amortized loan, but the interest-only payments will help you break even. You will only hold the property for two or three years, so the interest-only loan with a balloon payment would work. If you know you will be holding onto a property for 10 to 30 years as part of your long term tax saving retirement plan, you need to look at a fixed rate loan which gives you a lot more options.
If your retirement is closer and you are looking forward to having a strong income stream, selecting a 15-year loan is a great idea. Today, you’re still working and able to afford a higher monthly payment. You can even afford to carry a bit of a negative cash flow in order to pay off the loan faster. The extra monthly payments will go towards the principle, which reduces the loan faster. Your personal reduction will likely double, and overall, you will end up paying much less for that property than you would with a 30-year fixed loan.
Consider Seller Financing
With seller-financing, you can really get creative and write your own terms. This is a great solution if, as a buyer, you cannot qualify for the loan or you have too many loans already and the banks will no longer extend credit on a conventional loan. Or, maybe you just do not want to take out another loan to affect your credit. A seller may carry a loan to avoid paying taxes all at once. This also helps you acquire more properties that the bank wouldn’t lend on, and allows you to take advantage of leveraging without affecting your credit.
There are so many different loans and ways to finance an investment property. If we can help you find the funds you need, please contact us at Service Star Realty.